Topics: Uses of Cash Flow,Classification of Cash Flow & Types of Audit

1. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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USES OF
CASH
FLOWS
BY: MYRA FLOR G. CAGAS

2. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Provides information about the cash receipts and
cash payments of a business entity during the
accounting period.
Provides information about the cash receipts and
cash payments of a business entity during the
accounting period.
 Assesses the firm’s ability to generate cash and cash
equivalents
 Assesses the firm’s cash requirements or uses
 Assesses the firm’s ability to generate cash and cash
equivalents
 Assesses the firm’s cash requirements or uses
 Cash Flow- is the net amount of cash and cash-equivalents
being transferred into and out of a business. At the most
fundamental level, a company’s ability to create value for
shareholders is determined by its ability to generate positive
cash flows, or more specifically, maximize long-term free cash
flow.
Purpose of Statement of Cash Flow

3. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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The cash flow statement is intended to:The cash flow statement is intended to:
 The cashflowstatement is intendedto[4]
provide information on a
firm's liquidity and solvency and its ability to
change cash flows in future circumstances
provide additional information for evaluating
changes in assets, liabilities and equity
improve the comparability of different firms'
operating performance by eliminating the
effects of different accounting methods
indicate the amount, timing and probability of
future cash flows

4. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Helps investors with questions about
the company’s:
Helps investors with questions about
the company’s:
Ability to generate positive cash flows.
Ability to meet its obligations and to
pay dividends.
Need for external financing.
Investing and financing transactions
for the period.
Ability to generate positive cash flows.
Ability to meet its obligations and to
pay dividends.
Need for external financing.
Investing and financing transactions
for the period.

5. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Classification of Cash FlowsClassification of Cash Flows
Income Statement
Items
Changes in
Investments and
Long-Term Asset
Items
Changes in Long-
Term Liabilities and
Stockholders’ Equity

6. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Outflows to:
Suppliers of merchandise
and services.
Employees for services.
Lenders for interest.
Governments for taxes.
Outflows to:
Suppliers of merchandise
and services.
Employees for services.
Lenders for interest.
Governments for taxes.
Inflows from:
Sales to customers.
Interest and dividends
received.
Inflows from:
Sales to customers.
Interest and dividends
received.
Cash
Flows
from
Operating
Activities
Cash
Flows
from
Operating
Activities
+
_
Operating ActivitiesOperating Activities

7. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Cash
Flows
from
Investing
Activities
Cash
Flows
from
Investing
Activities
+
_
Inflows from:
Selling investments and plant
assets.
Collecting of principal on loans.
Inflows from:
Selling investments and plant
assets.
Collecting of principal on loans.
Outflows to:
Payments to acquire
investments and plant assets.
Purchase debt or equity
investments.
Make loans.
Outflows to:
Payments to acquire
investments and plant assets.
Purchase debt or equity
investments.
Make loans.
Investing ActivitiesInvesting Activities

8. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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+
_
Inflows from:
Short-term and long-term
borrowing.
Owners (for example, from
issuing stock).
Inflows from:
Short-term and long-term
borrowing.
Owners (for example, from
issuing stock).
Outflows to:
Repayments of borrowed
funds.
Owners for dividends.
Purchase treasury stock.
Outflows to:
Repayments of borrowed
funds.
Owners for dividends.
Purchase treasury stock.
Financing ActivitiesFinancing Activities
Cash
Flows
from
Financing
Activities
Cash
Flows
from
Financing
Activities

9. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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The operating cash flows section can be
prepared using either the direct method or the
indirect method.
The operating cash flows section can be
prepared using either the direct method or the
indirect method.
 Cash collected
from customers
 Interest and dividends
received
 Cash paid to
employees
 Cash paid to suppliers
 Interest paid
 Income taxes paid
Direct Method- is easy to read because it lists all of the
major operating cash receipts and payments during the period by
source.

10. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Indirect Method - indirect method of presentation is
very popular, because the information required for it is relatively
easily assembled from the accounts that a business normally
maintains in its chart of accounts.
The indirect method is less favored by the standard-setting bodies,
since it does not give a clear view of how cash flows through a
business.

11. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Cash Budgets are used by management to plan and
forecast future cash flows.
Cash Budgets are used by management to plan and
forecast future cash flows.
F o r c e m a n a g e m e n t t o c o o r d i n a t e a c t i v i t i e s .
P r o v i d e m a n a g e r s w i t h a d v a n c e n o t i c e o f a v a i l a b l e r e s o u r c e s .
P r o v i d e t a r g e t s u s e f u l i n e v a l u a t i n g p e r f o r m a n c e .
P r o v i d e a d v a n c e w a r n i n g s o f p o t e n t i a l c a s h s h o r t a g e s .
A C a s h B u d g e t c a n b e u s e d t o :
Managing Cash FlowsManaging Cash Flows

12. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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 Increase collection of accounts
receivables.
 Keep inventory low.
 Delay payment of liabilities.
 Plan timing of major expenditures.
 Invest idle cash.
 Increase collection of accounts
receivables.
 Keep inventory low.
 Delay payment of liabilities.
 Plan timing of major expenditures.
 Invest idle cash.
Managing Cash FlowsManaging Cash Flows

13. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Classification of AuditsClassification of Audits
Statutory and Non Statutory Audits
• Statutory audits cover :
a) Companies
b) Banking companies
c) Electricity Supply companies
d) Co operative societies
e) Public and Charitable Trusts
f) Corporations
g) Societies

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Classification of AuditsClassification of Audits
Non statutory Audits Cover :
1)Proprietory concerns
2)Partnership firms
3)Unregistered clubs and societies, etc.
Internal audit & external audits :
1)Internal audit – by own staff
2)External Audit – performed by duly qualified
professional accountants

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Primary distinction between internal and
external auditor
Primary distinction between internal and
external auditor
Internal Auditor
 to management
 will define on basis
of business activity
 has to ensure that
the accounting
system is efficient
as well as internal
controls to ensure
reliability of
financial records
External Auditor
 to owner’s of the
concern
 will define on the basis
of the information
required to express
opinion
 does not have any
limitation, there is no
fear or favour

16. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Classification of AuditsClassification of Audits
Interim, Final and Continuous audits :
1) Interim audit–during the year for a particular
period of the year to avoid too much in the end
2) Final Audit – after the end of the financial year to
audit complete accounts
3) Continuous Audit – Continuous and several
visits ( similar to internal audit)

17. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Interim AuditInterim Audit
Advantages :
1) Quarterly results
2) Interim Dividends
3) Quick preparation of final
Accounts
4) Up to date accounts for
banks/investors
5) Check on employees
6) Prevents errors and frauds
7) Thorough final audit
8) Utilisation of Audit Staff
Disadvantages :
1) Expensive
2) Audit in Instalments
3) Errors and Frauds in
books aleady checked
4) Disrupts Accounts Work

18. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Final/Periodic/Annual AuditFinal/Periodic/Annual Audit
Advantages :
1) Inexpensive
2) Audit at a stretch
3) Less errors and
Frauds
4) Does not Disrupt
Accounts Work
Disadvantages :
1) Delay in Final accounts
2) Late dividends
3) Stale accounts for
bankers/investors
4) No moral check on
employees
5) No familiarity with Clients
business
6) Sample Check
7) Uneven Work load for Audit
Staff

19. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Continuous AuditContinuous Audit
Advantages :
1) Quick preparation of final
accounts
2) Early dividends to
shareholders
3) Up to date accounts for
banks/investors
4) Check on employees
5) Prevents Errors and Frauds
6) Familiarity with clients
business
7) Thorough audit
8) Utilization of Audit Staff
Disadvantages :
1) Expensive
2) Audit in instalments
3) Errors and frauds in
books already checked
4) Disrupts accounts work
5) Undue Reliance on
Auditors

20. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Kinds of AuditKinds of Audit
These audits have specific purpose and may
or may not be statutory
1. Cost Audit – examine cost records, weaknesses in
system, obligatory for some
2. Tax Audit – u/s 44AB of I.T. Act
3. Management Audit – comprehensive and constructive
examination of company’s organisational structure

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4. Social Audit – special responsibility audit towards public,
staff, government, etc
5. Balance Sheet Audit – commences from balance sheet
and goes back to the books of accounts
6. Systems based Audit – evaluation of accounting system
to ascertain reliability – proper system then minor
checking, if not then detailed checking
7. Energy Audit – whether right amount of energy is used by
the enterprise, done by technically qualified persons
8. Secretarial Audit – for Compliance with provisions of
various Corporate Laws in terms of legality as well as in
terms of timeliness. (replaced by compliance certificate
by Company Secretary)

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Balance Sheet AuditBalance Sheet Audit
Applicability :
1)Strong internal control system
2)Large volume of transactions
3)Internal Audit Department exists
4)Accounts staff is highly qualified,
professional management, computerised
accounts

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Balance Sheet AuditBalance Sheet Audit
Method on B/S audit :
1)Review of Internal controls – whether effective,
internal control in operation
2)Verification of Items in the final Accounts –
verification, inspection, vouching, valuation,
presentation and disclosure
3)Specific Items – all aspects of fixed assets, drs,
crs, cash, stock, bad debts, contingent
liabilities
4)Overall checking of final Accounts (Analytical
Review) – important ratios, non recurring
transactions, funds flow, minutes

24. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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Inherent Limitations of AuditingInherent Limitations of Auditing
1) An auditor cannot check each and every transaction
2) Audit evidence is not conclusive in nature
3) An auditor cannot be expected to discover deeply
laid frauds
4) Audit cannot assure future profitability and future
prospects
5) Auditor has to rely upon experts
6) Auditor is supposed to be but may not be
independent
7) Financial statements though audited have their
inherent limitations